Be wary of Santander's Mexican fiesta

When it comes to selling assets, Emilio Botin's timing is hard to fault. From the sale of Italy's Antonveneta in 2007 to the IPO of its Brazilian unit in 2009, Santander's boss has a knack for getting out at the top. Investors may want to keep this in mind as the Spanish bank gears up to list its Mexican subsidiary.

It's easy to see why Santander might want to do a Mexican IPO. The economy is growing at a healthy clip, credit is booming and bad loans shrinking – the exact opposite of Santander's home market, Spain. There's plenty of room for expansion, too: bank loans account for just 20 per cent of GDP, compared with 49 per cent in Brazil and 80 per cent in Chile, according to JPMorgan.

Meanwhile, Santander could use some spare capital at home. Though Spanish regulators have asked it to set aside more provisions for property loans and European supervisors have set a high capital bar as part of the latest stress tests, investors are still worried about its Spanish exposure. Plans for an IPO of its British unit have been put on hold.

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According to news reports, the Mexican unit – the country's fourth-largest lender by assets – might be worth $15-billion (U.S.) to $20-billion. Given that Santander bought a stake from Bank of America two years ago at an implied valuation of $10-billion, that may seem rich. But the division's prospects have improved since. Cheuvreux expects it to earn €1.2-billion next year, about double the figure for 2010.

Apply the consensus multiple of 10.8 times earnings for Grupo Financiero Banorte – the only comparable listed Mexican bank – and Santander's business would be worth €13.3-billion euros ($17.5-billion), enough to generate a hefty capital gain for its parent.

But investors who remember Santander's Brazil IPO, now languishing 38 per cent below the issue price, may be wary. Italy's Monte dei Paschi, meanwhile, has never recovered from overpaying for Antonveneta. Given Santander's history of canny selling, investors may take some persuading before they buy.

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